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Fire Sales and the Financial Accelerator, Woon Choi, David Cook

Creator
Contributor
Abstract
During periods of financial turmoil, increases in risk lead to higher default, foreclosure, and fire sales. This paper introduces a costly liquidation process for foreclosed collateral and endogenous recovery rates in a dynamic stochastic general equilibrium model of the financial accelerator. Consistent with empirical evidence, we find that recovery rates are pro-cyclical when collateral is costly to liquidate. Through links between recovery rates, risk premia, and default risk, the model generates an additional liquidity spiral, a feedback loop for the financial accelerator. We illustrate how collateral liquidation and monetary policy alter the impacts of a financial shock. We also show that a government subsidy on collateral liquidity and the endogenous accumulation of liquidity inventory help dampen the liquidity spiral by shoring up recovery rates
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; I. Introduction; 1. Recovery and Default Rates; II. The Model; A. Competitive Firms; B. Household; C. Capitalists; D. Retailers and Wholesalers; E. Central Bank and Shocks; F. Calibration; G. Discussion: Financial Shocks and Liquidity Spirals; 2. Financial Shocks and Liquidity Spirals; III. Model Results; A. Impacts of Financial Shocks and the Role of Collateral Liquidity; 3. Responses to a Financial Uncertainty Shock: Liquid Model versus Illiquid Model; B. Interest Rate Policy Response: Concerns about Recession Risk
Language
eng
Literary Form
non fiction
Note
"June 2010"
Physical Description
1 online resource (44 p.)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781455255597

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